My friend is purchasing a house with a 4% 15 year mortgage. He intends to add an additional $10,000 to the mortgage above the purchase price and closing costs for unanticipated expenses like repairs or emergencies, and he has asked my opinion.

This seems unwise to me, but I am notoriously frugal. I believe that "extra money" tends to melt away. Do the Bogelheads have an opinion on this?

I'm not sure you can just "add' extra money to a mortgage except if he were to put less of a down payment. This would not be a good idea if PMI kicks in. Seems like he would be better off opening a HELOC. Although the best solution is not buying a house until your emergency fund is or quickly will be large enough to cover unexpected expenses.

Last edited by barnaclebob on Fri Sep 14, 2018 2:46 pm, edited 1 time in total.

Will the bank do this? I was under the impression they don't do that any more.

I think it would be a fine idea in terms of the interest rate if he has the cash flow to pay it back. It does increase the likelihood that his mortgage would be under water in the event that he ever needs to sell.

Whether this is a good idea for the bank to extend credit that isn't backed by the house itself is quite another story.

I'm not sure you can just "add' extra money to a mortgage except if he were to put less of a down payment. This would not be a good idea if PMI kicks in. Seems like he would be better off opening a HELOC. Although the best solution is not buying a house until your emergency fund is or quickly will be large enough to cover unexpected expenses.

I believe that his parents are putting up 50% of the value of the house, so his mortgage will cover the remaining 50%, the closing costs, and the "extra" $10,000.

I'm not sure you can just "add' extra money to a mortgage except if he were to put less of a down payment. This would not be a good idea if PMI kicks in. Seems like he would be better off opening a HELOC. Although the best solution is not buying a house until your emergency fund is or quickly will be large enough to cover unexpected expenses.

I believe that his parents are putting up 50% of the value of the house, so his mortgage will cover the remaining 50%, the closing costs, and the "extra" $10,000.

Yeah that's not how mortgages work. You don't just get to ask the bank for 10k in cash at closing because there is no reason for it. Basically you tell the bank what mortgage you need, what your down payment will be and they approve it or not. Then the title/settlement company adds in the closing costs, prepayments, fees, etc and tells you how much cash to bring to close. If the goal is an extra 10k in the bank after closing then he just tells the lender his down payment is 10k less. The parents would just pay say 47%, give 10k to your friend and his mortgage would be 53%. Or they could stick to the 50/50 arrangement and the parents would loan him 10k. However, the closing costs could probably be rolled into the mortgage because of the high down payment and your friend would then have that cash in his pocket.